While giving property players enough room to float Real Estate investment Trusts (REITs), the final guidelines for these listed investment vehicles, announced by the capital MARKETS regulator on Sunday, also build in adequate safeguards for investors. As such, the minimum size of assets that a REIT must have, to be able to float an initial offer, has been halved to Rs 500 crore from the originally envisaged R1,000 crore; the lower threshold is expected to encourage mid-sized developers to participate.

At the same time, however REITs have been made accountable and, if they choose the special purpose vehicle (SPV) route, they must have a controlling interest of at least 50% in commercial real estate. Further, the SPV must hold at least 80% of the assets directly in properties and cannot invest in other SPVs, a move probably aimed at preventing FUNDS from being funnelled into numerous entities.

The regulator, on Sunday, also announced guidelines for Infrastructure Investment Trusts (InvITs), to attract FUNDS to the space, most of which appear reasonable. However, as infra projects are capital intensive, with a debt-equity ratio of 3:1, it could be a challenge to comply with the condition that consolidated borrowings should not exceed 49% of the value of the InVit's assets, experts said. Also, as Hemal Mehta, Senior Director, Deloitte Touche Tohmatsu India, pointed out, the flexibility given to the business trust to acquire the assets directly is virtually theoretical in the absence of corresponding fiscal benefits. "The benefits, in the nature of deferred taxation, in the hands of the developer are linked to the transfer of shares of the SPV and not the assets. So, if the trust acquires assets directly, the sponsor wonít get the benefits," Mehta observed.

Ashok Tyagi, Group CFO, DLF, told FE he would await clarifications on the tax structure.

"Even if the tax is levied at the time of sale of REITs, we need to understand whether the tax treatment will be like that for equity shares or the way it is for mutual FUNDS," Tyagi said.

The government, via the Finance Bill, cleared the way for the introduction of the REITs and InvITs in May. REITs and InvITs were allowed tax pass-through status, implying they donít have to pay income tax if the income is allocated among unit owners as taxable dividends, which flagged their utility as "instruments of INVESTMENT pooling."

SEBI chairman, UK Sinha, observed that when the SPV is transferred to the REIT, at that stage there will be a tax deferral. "That means at that stage, tax will not have to be paid. When the investor in that original project SPV finally disposes of his property at that stage he will be paying the tax," Sinha said.

While REITs can have multiple sponsors, their number is capped at three each of whom must own at least 5% of the units. Moreover, even after three years of listing, they must hold a minimum 15% throughout the life of the REIT, the Securities and Exchange Board of India (SEBI) has stipulated. The concept of a single asset REIT has been withdrawn and with a view to ensuring that the risk is diversified, a REIT must invest in at least 2 projects with not more than 60% of value of assets INVESTED in one project.

With the minimum subscription size for units of REITs fixed at Rs two lakh, the investor base can be fairly large, Neeraj Bansal, Partner, KPMG, observed adding that around $10 billion worth of INVESTMENTS could be expected over the next few years."

InvITs shall INVEST in infra projects directly or through an SPV; for PPP projects, such investments shall only be through an SPV. Explaining the reason for this, Deloitte's Mehta said, "In a PPP project there is a concession agreement, which says that the project will be housed in a company, governed by the Companies Act. If the project is moved out of the company, it ceases to exist. If the Invit acquires only the assets and not the shares, the benefits of concession agreement will no longer be available to the Invit," Mehta observed.

Getting real

* INVESTMENT by REITs to be in commercial real estate, directly or via SPVs

* REITs must hold or control at least 50% of capital

* SPVs to have at least 80% of assets directly in properties, cannnot INVEST in other SPVs